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A Bit of History and the Definition of The Flat Tax

Last week I wrote that it’s time for a flat tax. It’s fair. It’s simple. There’s no need for an army of naturally biased bureaucrats to enforce it. My search for information on the different flavors of the Flat Tax has led me to, of all places, NPR. That’s right. The government sponsored news and entertainment organization of Michael Feldman, the Magliozzi brothers and Nina Totenberg has a pretty good timeline of flat tax proposals. Not all of them of course and nothing current but I suppose it’s hard to stay on top of good ideas when you’re pushing the government’s ideas.

We begin with the Revenue Act of 1863[sic], 1862 actually, which was used to fund the northern side of the civil war. It started at $600 of income from property and had a 3% rate up to $10,000 and 5% beyond that with many, many deductions, including one for congressmen (Section 90, page 42). In today’s dollars $600 and $10,000 work out to about $13,000 and $225,000 respectively. Human nature and hence our government being what it is, the act was significantly amended the next year and the year after that. It was eventually repealed in 1871.

1894 was a hallmark year in the history of income taxes. Congress passed the Wilson–Gorman Tariff Act providing for a 2% flat tax for incomes over $4,000, about $140,000 today. The USSC quickly had their say and in 1895 decided Pollock v. Farmers’ Loan & Trust Co. striking down the income tax as unconstitutional under the Uniformity Clause. The reason for the Constitution’s Uniformity Clause was to prevent poor states taking from rich states and vice versa. This USSC decision led to the Sixteenth Amendment ratified in 1913 enabling non-uniform income taxes.

It didn’t take long for the nation to take advantage of the modified constitution. Right away congress passed a very progressive income tax starting with a 1% rate up to $20,000 of income and incrementally increasing to 7% beyond $500,000. That’s about $475,000 to $10,000,000, respectively, today. The extent and rates have been changing every year after that.

Fast forward to 1962 when Uncle Milty wrote “Capitalism and Freedom” where he called for a flat tax. In a subsequent writing, he defined a flat tax as one where a single rate applies to everyone and the tax base covers the entire income base. Milton Friedman decided that uniformity and extent were the measures of a flat tax. All proposals for flatter taxes can be compared to this ideal. That is, does it cover ALL income? Second, is EVERY KIND of income taxed at the same rate? If not then its objective shortcomings can be identified and explained to describe what is special about the less-than-flat tax proposal.

This seems like a good point to pause. A bit of history has been given and an objective measure has been defined. We can now describe flat taxes through to today against Milton Friedman’s definition. Next week I’ll take it up from there. For a teaser, note that the idea of a flat tax is so attractive to our sense of fairness that even Governor Moonbeam, yes, Jerry Brown, proposed one.